According to the Wall Street journal, 70% of Americans are living paycheck to paycheck. Maybe you made a difficult and less popular decision to have a cash flow plan for your finances. You took the road less traveled where only 32% of Americans budget every month.
The Webster’s definition of a budget is “An amount of money available for spending that is based on a plan for how it will be spent.” Let’s expand upon this definition by saying “before the month begins.” Why? Mostly because we don’t want our month and spending to get ahead of our plan.
Your plan is just a forecast based on what you want to happen. We only have a certain amount of income each month so we need to be intentional with how it will be used. Then throughout the month we need to track how we have been doing and compare our plan with what actually occurred. Is it perfect? Rarely!! The good news is that it gets better over time.
When we have a monthly cash flow plan for our finances, it helps increase the chances that we will not spend more than we make. Also, by using a cash flow plan, we will begin understanding the difference between what we “want” as compared to what we “need”.
What are some of the most common spending problems that people face? A house that’s too large, a car that’s too luxurious, or a credit-card lifestyle that’s too lavish for our income. How can you tell if something is a problem area? The conservative estimate on how much your monthly mortgage payment should be is 25% of after-tax income. The traditional model is 35%-45% of monthly pretax income.
As for transportation/vehicle payment, your total monthly vehicle expense including principal, interest and insurance, should not exceed 10% of your gross income.
Now onto personal debt such as credit card payments, student loans, and personal loans. When you are starting out try not to allocate more than 5-7% of your income to be used for debt (this excludes housing and transportation).
Would you like a tool that can quickly show you what percent of your monthly income is being spent on housing, transportation and debt? Check out the Spend Life Wisely budget tool which is super easy to use, and you can see if any of these common spending problems may be impacting your budget.